Florida Real Estate Sales Associate Examination Content OutlineReal Estate FinanceHard
An investor is considering purchasing a commercial property and is evaluating the use of a non-recourse loan. Which of the following statements accurately describes a key characteristic of a non-recourse loan?
- AThe borrower is personally liable for the full amount of the debt.
- BThe lender can pursue the borrower's personal assets in case of default.
- CThese loans typically carry lower interest rates due to reduced lender risk.
- DThe loan is secured only by the property itself, limiting the lender's recourse to the collateral.
Show answer & explanationAnswer & explanation
Correct answer: D. The loan is secured only by the property itself, limiting the lender's recourse to the collateral.
A non-recourse loan explicitly states that the borrower is not personally liable for the debt. In the event of default, the lender's only recourse is the collateral securing the loan (the property itself), meaning they cannot pursue the borrower's other personal assets.
Why the other options are wrong
- A. This describes a recourse loan, where the borrower is personally liable.
- B. This also describes a recourse loan, where personal assets can be pursued.
- C. Non-recourse loans typically carry higher interest rates or require more equity due to the increased risk for the lender.
Non-Recourse Loan
A type of loan where the lender's claim against the borrower in the event of default is limited to the collateral pledged for the loan, typically the property itself, and does not extend to the borrower's personal assets.
- Common in commercial real estate financing
- Protects the borrower's personal assets from seizure upon default
- Lender bears more risk, often resulting in higher interest rates or stricter terms
- Borrowers are still liable for 'bad boy' carve-outs (e.g., fraud, misapplication of funds)
Memory trick: Non-Recourse: 'No Reach' for personal assets.